1 / 10

Diversification Strategy

Diversification Strategy. OUTLINE. Introduction: The Basic Issues The Trend over Time Motives for Diversification - Growth and R isk Reduction - Shareholder Value: Porter’s Essential Tests Competitive Advantage from Diversification Diversification and Performance: Empirical Evidence

gzavala
Download Presentation

Diversification Strategy

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript


  1. Diversification Strategy OUTLINE • Introduction: The Basic Issues • The Trend over Time • Motives for Diversification - Growth and Risk Reduction - Shareholder Value: Porter’s Essential Tests • Competitive Advantage from Diversification • Diversification and Performance: Empirical Evidence • Relatedness in Diversification

  2. The Basic Issues in Diversification Decisions Superior profit derives from two sources: INDUSTRY ATTRACTIVENESS RATE OF PROFIT >COST OF CAPITAL COMPETITIVE ADVANTAGE • Diversification decisions involve these same two issues: • How attractive is the sector to be entered? • Can the firm achieve a competitive advantage?

  3. Diversification among the US Fortune 500, 1949-74 70.2 63.5 53.7 53.9 39.9 37.0 29.8 36.5 46.3 46.1 60.1 63.0 Percentage of Specialized Companies (single-business, vertically-integrated and dominant-business) Percentage of Diversified Companies (related-business and unrelated business) Note: During the 1980s and 1990s the trend reversed as large companies refocused upon their core businesses 1949 1954 1959 1964 1969 1974

  4. Diversification among Large UK Corporations, 1950-93

  5. Diversification: The Evolution of Strategy and Management Thinking MANAGEMENT PRIORITIES Quest for Growth Addressing under-performance of widely-diversified firms Creating shareholder value • Competitive advantage through speed & flexibility • Creating opportunities for future growth • Emergence of conglomerates • Diversification by established companies into related sectors Emphasis on “related’ & “concentric” diversification • Refocusing on core businesses • Divesting diversified businesses • Joint ventures and alliances • Creating growth options • through focused • diversification DEVELOPMENTS IN CORPORATE STRATEGY STRATEGY TOOLS & CONCEPTS • Financial analysis • Diffusion of M form structures • Creation of corporate planning depts. • Economies of scope & synergy” • Portfolio planning models • Capital asset pricing model • Maximization of shareholder wealth • Core competences • Dominant logic • Dynamic capabilities • Transaction cost analysis • Real options 1960 1970 1980 1990 2000 2006

  6. Motives for Diversification GROWTH --The desire to escape stagnant or declining industries a powerful motives for diversification (e.g. tobacco, oil, newspapers). --But, growth satisfies managers not shareholders. --Growth strategies (esp. by acquisition), tend to destroy shareholder value RISK --Diversification reduces variance of profit flows SPREADING --But, doesn’t create value forshareholders—they can hold diversified portfolios of securities. --Capital Asset Pricing Model shows that diversification lowers unsystematic risk not systematic risk. PROFIT --For diversification to create shareholder value, then bringing together of different businesses under common ownership & must somehow increase their profitability.

  7. Diversification and Shareholder Value: Porter’s Three Essential Tests If diversification is to create shareholder value, it must meet three tests: 1. The Attractiveness Test: diversification must be directed towards attractive industries (or have the potential to become attractive). 2. The Cost of Entry Test: the cost of entry must not capitalize all future profits. 3. The Better-Off Test: either the new unit must gain competitive advantage from its link with the company, or vice-versa. (i.e. some form of “synergy”must be present) Additional source of value from diversification: Option value

  8. Competitive Advantage from Diversification • Predatory pricing/tie-in sales Evidence • Reciprocal buying of these • Mutual forbearance is sparse MARKET POWER • Sharing tangible resources (research labs, distribution systems) across multiple businesses • Sharing intangible resources (brands, technology) across multiple businesses • Transferring functional capabilities (marketing, product development) across businesses • Applying general management capabilities to multiple businesses ECONOMIES OF SCOPE • Economies of scope not a sufficient basis for diversification ----must be supported by transaction costs • Diversification firm can avoid transaction costs by operating internal capital and labor markets • Key advantage of diversified firm over external markets--- superior access to information ECONOMIES FROM INTERNALIZING TRANSACTIONS

  9. Relatedness inDiversification Economies of scope in diversification derive from two types of relatedness: • Operational Relatedness-- synergies from sharing resources across businesses (common distribution facilities, brands, joint R&D) • Strategic Relatedness-- synergies at the corporate level deriving from the ability to apply common management capabilities to different businesses. Problem of operational relatedness:- the benefits in terms of economies of scope may be dwarfed by the administrative costs involved in their exploitation.

  10. Branson & the Virgin Companies: Making strategic sense of apparent entrepreneurial chaos • KEY RESOURCES • Virgin brand • Branson • -charisma/image • --PR skills • -networking skills • -entrepreneurial flair • DOMINANT LOGIC • Seek competitive advantage by start-up cos. • pursuing innovative differentiation in • underserved market with sleepy incumbents • CHARACTERISTICS OF • MARKETSTHAT CONFORM • TO THIS LOGIC • Consumer businesses • dominant incumbent • scope for new approaches • to customer service • high entry barriers to other • start-ups • Branson/Virgin image • appeals to customers • DESIGNING A CORPORATE STRATEGY • & STRUCTURE • What’s the business model? • (Does Virgin create value by • being an entrepreneurial incubator, • a venture capital fund, a • diversified corporation, or what?) • Which businesses to divest? • Criteria for future diversification • What type of structure?—Is there • a need for greater formalization?

More Related